Pricing in microinsurance and the challenges actuaries face - Interview with Howard Bolnick
In light of the upcoming 7th International Microinsurance Conference, which will be taking place in Rio de Janeiro, Brazil from 8 to 10 November 2011, the organisers, Munich Re Foundation and the Microinsurance Network, are interviewing selected speakers at the conference to highlight the content that will be discussed.
This first interview with Howard Bolnick, Chair of the International Actuarial Association’s Working Group on microinsurance, highlights the content of session 15 of the conference, which is entitled “Case studies in pricing microinsurance products”.
1. How did you become involved in microinsurance and what is your current role?
I became involved in microinsurance through my active role in the International Actuarial Association (IAA), which represents the actuarial profession in matters of interest to the worldwide profession. Following the lead of some influential leaders of actuarial associations in developing countries such as Mexico, IAA leaders formed a microinsurance task force in 2006 to study what was to us a new area of insurance and to make recommendations to them about if and how actuaries might become involved. I joined this task force at its inception out of personal interest in expanding my own professional horizon. IAA task force activities involved exposure to microinsurance organisations, such as the Microinsurance Network and the ILO’s Microinsurance Innovation Facility, and also to functioning microinsurance organisations during field-trips organised around our meetings and invited speakers. What we learned was that microinsurance, indeed, would benefit from the interest and support of the international actuarial community.
In April 2009, the IAA formed a Micro-Insurance Working Group and I was asked to lead it, in large part due to my familiarity with IAA’s leaders and knowledge of how the organisation functions. The IAA’s worldwide membership network allowed the new Working Group to quickly build its membership by identifying and recruiting the small number of members with microinsurance experience and to make contact with key international organisations and people involved in the worldwide growth of microinsurance. The IAA Micro-Insurance Working Group in a relatively short time has become deeply involved in the international microinsurance community. My role continues to be to provide leadership to the IAA Micro-Insurance Working Group, help to develop its agenda, and to build relationships with leaders of the international microinsurance community.
2. With the current lack of actuarial microinsurance experts in the world, what needs to be done to address this problem?
The principals that underlie microinsurance organisations’ risk bearing activities are familiar to actuaries around the world who practice in various lines of insurance in the developed world - though, the context varies significantly from our experiences at home. To be successful, microinsurance practitioners need to understand the risk bearing principals upon which their success depends. To be helpful, actuaries need to understand the very different cultural and economic circumstances faced by microinsurance organisations. Our challenge is to expand the existing core group of actuaries who understand the contextual issues and can effectively translate their knowledge of risk bearing principals to the organisers, operators, and technical people working in microinsurance organisations. Our new role as the Actuarial Discussion Group within the Microinsurance Network will help us to better understand the needs of the microinsurance community and allow us to effectively engage with the community.
3. How important is pricing in microinsurance? And what can happen if one gets it wrong?
The obvious explains the importance of pricing correctly - if premiums are too low, risk bearing is unprofitable, and, if premiums are too high, customers who can be effectively served by insurance will decide not to buy insurance causing a failure to thrive among microinsurance organisations. Government and donor developmental-stage subsidies allow some leeway for pricing errors, but over time microinsurance organisations will need to stand on their own, which requires proper pricing. Thus, proper pricing is every bit as important to microinsurance organisations as to insurance companies in the developed world.
4. What are the main challenges and obstacles when pricing a microinsurance product?
The largest single obstacle is a lack of relevant data to price risks. This is a huge challenge, and one without easy short-term solutions. A second major challenge is to transfer to the actuaries and technicians actually doing pricing on behalf of microinsurance organisations the skills and tools they need to do a proper and professional job.
5. What is the role of data? And how can one cope when there is a lack of significant data?
There are many sound approaches to dealing with a lack of needed data. The international actuarial community is already working on independent projects and projects in cooperation with other organisations, such as the ILO’s Microinsurance Innovation Facility, to develop education and tools needed to allow these techniques to be used by microinsurance practitioners. We look forward to expanding the scope of this important work as we continue to build relationships with members of the international microinsurance community.
6. Will pricing becoming easier over the next 5 years?
Yes, definitely - as long as we work cooperatively with the microinsurance community to make reasonable provision for the collection of relevant data from microinsurance organisations. Absent relevant data, the problems we face today will not go away.